Legal vodka production falls by one-third in Russia

Production of Vodka decreased by 30% in May after the market was flooded with illegally made product following a rise in excise duty earlier this year.

Production volumes have been declining since the beginning of the
year, business daily Kommersant reports.
The drop was 30.3% in January, 25.8% in February,
22.1% in March , and 17.9% in April. Spirits
producers attributed the decline to large stocks made at the end
of 2012 before a record increase in the excise tax, according to
Kommersant.

The excise tax rose by 33% on January 1 which caused the minimum
retail price of a half litre of vodka to rise to 170 roubles
(around $6)

"We see that the manufacturers of counterfeit vodka have
revived, " Kommersant quotes Aleksandr Mechetin the
head of spirit producer "Synergy".

The illegal market has been boosted by smuggled vodka from
neighboring Kazakhstan, part of the Customs Union, says the vice
president of the Russian Standard Igor Kosarev.

"The excise tax is five times smaller there, so our market
is very attractive to them," he said.

The fight against illicit trade was one of the main reasons for
setting up the Federal Service for Alcohol Market Regulation in
2008. The introduction of minimum prices for vodka, cognac
and other alcoholic beverages more than 28 degree proof, and the
change to the taxation system are among the measures taken by the
organization. After that the illegal vodka market shrank to
24% from almost 50% in previous years, business daily
Kommersant reports.

"Before the beginning of this year illegal vodka was washing
out from the market. Now, thanks to a sharp increase in excise
duty, the process has reversed , " Kommersant quotes
the chairman of the Union of Alcohol Producers Dmitry
Dobrov. He says legal production of vodka could decline
even more in the future as illegal market is growing as
"the margin there now is just fantastic."
Illegal vodka now makes up a third of the market, Kommersant
quotes experts.

The Russian Ministry of Finance plans to further raise taxes on
alcohol. The excise tax on alcoholic beverages could
increase up to 25% on spirits, 14% on wine, and 4% on
champagne.

Russian vodka sales may decrease by a further third within five
years due to the government’s duty tax rises; its pressure on the
illegal trade; and the shift by consumers to new
categories, Renaissance Capital estimates.

Vodka is still the most popular drink in the world, according to
the recent report by the UK-based International Wine & Spirit
Research (IWSR). The global consumption of vodka was 4.44 billion
liters in 2012, according to the report. Russians were
responsible for drinking nearly half the global total, the
equivalent of 14 liters per person.
The US is the second biggest vodka consumer with 1.9 liters per
person.

In 2012, global spirits consumption grew by 1.6% to 3.07 billion
nine-liter cases compared to 6.5% growth in 2011, according to
IWSR.